- January 8, 2020
- Posted by: eroconnew
- Category: General reading
What are the operating costs and Profit Margins in a school project
One of the most important aspect for new promoters wanting to explore the idea of setting up new school project is the running cost, operational cost and profit margins along with assessing Return on Investment on the project. These information and assessment are necessary for any prospective promoter to have in hand before wanting to engage their resources and time for venturing into the K-12 education segment.
The intent should be to always analyze the market, its potential, understand existing competition, target market segment, market acceptability trend for fee and last but not all the least, land price that leads to derivation of the initial Project investment size. A market could be conservative or aggressive depending on the demand of a particular concept note and facility note school having the necessary product differentiation factors. It is necessary for any new promoter to understand that school projects are heavily a market driven and location specific venture. The segment existing in the nearby catchments as well as the price of the land are major decision points for a school project to finalize their fee positioning which in turn leads to facility plan inputs for the offering. These analysis and reflectors lead to derivation for feasibility for a project. Depending on the target market segment and fee structure, the future volume addition trend is anticipated.
Coming back to our initial point of concern in terms of Return on Investment, prioritization of budget for development of infrastructure and pre operational costs such as marketing, recruitment, 1st year working loss capital provision have to be effectively balanced safeguarding clients from overspending on unnecessary aspects which will not contribute to the venture and entry strategy for the school but definitely increase the budget and hence increase the gestation period of the project. 70-80% of the total project cost as derived for a new school set up is based on construction of school building and campus development. Efficient planning shall give the required inputs to prospective promoters to be able to understand their priorities and invest wisely thereby having a practical budget for development of a new school project. Higher the fee segment, higher shall be the infrastructure cost as 1st year positioning of the brand is heavily relying on the first impression that the school creates. Higher fee segment school shall attract upper mid segment and premium segment parents. Similarly, low fee structure schools attract low income segment parents and mid income fee structure schools in general attract all segments where stress is laid towards value for money proposition for higher level of acceptability while it having enough fee to be able to have good pay scale implementation in terms of salaries attracting good human resources which happens to be the major product differentiation factors for such schools.
For a premium segment school, the infrastructure cost and investment size gets increased as built up area for the building increases on account of justifying the premium feel to appeal to the minds of premium and aware parents. Lesser number of students per section, higher circulation spaces, bigger public and corridor zones, high classroom versus facility rooms ratio. On the contrary, low fee structure schools have lesser infrastructure development cost where nominal but better than competition facility offering. Premium facility schools are assessed on not only teachers and infrastructure but exposure platform avenues for which the necessary area allocation is required during construction which is not the case with low fee structure schools where good academics forms the basis of school’s success or failure and hence relatively less construction sizes for the same number of students.
As the best school planners and consultants in the country, Erocon recommends as a thumb rule development of infrastructure to have a capacity of 800 -1000 students in Phase 1 in an ideal scenario depicting all necessary concept note, USP, facility note while having complete campus development and outdoor sports facilities in place. Irrespective of the investment size and built up areas, 800 – 1000 student capacity is being recommended for reasons that shall follow.
- For an annual recurring fee structure of Rs 20,000 – 35,000, the operational breakeven is achieved around 480-525 students considering state pay commission norms for staff salaries.
- For an annual recurring fee structure of Rs 40,000 – 75,000, the operational breakeven is achieved around 375 – 430 students considering 7th Pay commission norms for staff salaries.
- For annual recurring fee structure higher than 75,000, the operational breakeven is achieved around 320-350 students considering 7th Pay commission norms for staff salaries.
The advantage that a venture receives if Phase 1 construction is planned for 700 – 900 students is
- Strong brand positioning on account of excellent infrastructure and strong first impression
- Depiction of Concept note, USP zones, Facility note.
- Self Sustainable Venture which would have the capability to fund the next development of the school and campus. For 700 – 900 students, as a thumb rule for any fee structure school, the ratio of expense to surplus is 67 to 33 percent. 67% being cost and 33 percent being the surplus. This surplus should be equivalent to have the necessary volume to be able to fund the next building block of the school effectively.
- All CBSE/ICSE/IGCSE/IB building and infrastructure requisites get fulfilled where affiliations can be granted on the given building infrastructure and no new building blocks are required to be created saving additional construction cost just to be eligible as per infrastructure requirements of affiliations.
In continuation to the above points, with more number of students, the per student expense cost gets reduced and hence for students over 1500, the margins are in the tunes of 38% as surplus and over 2000 – 2200 students, 40 – 45% surplus margins can be achieved in a school project sparing best of expenses for staff, teachers or facilities.
Return on Investment Period & Gestation Period
- Again, irrespective of the project scale, as thumb-rule, the following considerations can be taken into account given the construction size in Phase 1 is for 700 – 900 students as suggested above.
- If land is available, then Return on Investment on project where average volume addition trend is in the range of 150 – 250 students in 6-8 years Where Phase 1 as well as Phase 2 have already been constructed.
- If land is purchased at market price and total project cost is inclusive of the land cost. Then as a recommendation, the land cost should not exceed 40% threshold of the total investment size for setting up Phase 1 for the new school project. Continuing with inputs on gestation of period, the ROI or break even on the project considering development of All phases for the school shall come around 9 – 11 year time period
- It is to be noted that the development of Phase 2 for the school project through school fund surplus has been taken into account to provide thumb- rule inputs on tentative break-even period in a school project.
However the above mentioned figures are on the basis of the 30 years of experience and being the best school consultants, Erocon School consultants, in the field of K-12 school domain setting up schools in the range starting from 5 Cr up to 200 Cr. All projects on account of detailed feasibility study and market analysis shall have their own dynamics and break-even period in places.